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Next year’s investment decisions will need to be based on realising investment goals rather than paralysis and passivity

By Susan Barreto

Judging by the same names that keep coming up, alternative
investing seems, well, not so alternative any more. In a closer
look at the managers favoured by registered investment
companies in the US, the convergence of FoHFs and mutual funds
just moved a step closer. But what is even scarier is that
institutional investors are only a step behind. The brands
chosen by RICs yesterday have become the long-term picks of the
direct allocators today.

DE Shaw, Brevan Howard, Bridgewater, Elliott Associates, Och
Ziff and Winton Capital are just a few of those deeply
entrenched in the portfolios of funds of hedge funds (RICS and
others), as well as pensions and endowment portfolios. But why
are investors not sourcing new talent?

The answer lies beyond returns, beyond investing and beyond
the bottom-line good of the pensioner at the end of the food
chain. It seems that investors are plagued by a common
complaint: fear.

Fear of losing out on future offerings if they terminate a
manager that is underperforming; fear of burning bridges
prematurely; fear of allocating to a manager that is too small
or too new; and one must also not forget the fear of good, old
career risk. They may also remember that FoHFs get a bad rap
for manager churning and may like the idea of being revered as
stalwart long-term investors.

It seems that little thought is given to determining when a
manager may have outgrown its strategy; and the current
low-performing environment has highlighted that true
'active’ management of multi-manager hedge fund
portfolios may very well be dead.

Perhaps institutions are happy with the returns they are
getting? After all, who can argue with allocating to Brevan
Howard? Both the multi-strategy and global macro funds have
been nominated for awards at the annual EuroHedge gala dinner
to be held on 26 January in London. In addition to the RICs
(see page 14), Brevan Howard can be found in the portfolios of
West Virginia Investment Management Board, New Jersey Division
of Investment and Rhode Island Employees’
Retirement System (see pages 8-9).

Capula and Marshall Wace have also made the cut at both the
upcoming EuroHedge Awards in London and Rhode Island Employees
Retirement System and West Virginia Investment Management
Board. It might be worth mentioning that Rhode Island is just
now beginning to allocate to hedge funds and it has already
sourced some of the top names in the industry.

The story is the same in the US. At this year’s
AR Awards, Ray Dalio’s Bridgewater Associates took
home the Management Firm of the Year prize for the second
consecutive year. DE Shaw and Brevan Howard were nominated for
other categories, along with York and King Street, still
popular among most large US public pension funds, endowments
and foundations, and not forgetting the RICs.

Paulson, however, is an example of where past performance
does not guarantee future returns. New Mexico Public Employees
Retirement Association, New York State Common Retirement,
Indiana Public Employees Retirement System and Philadelphia
Board of Pensions and Retirement all raced into Paulson from
2008 through 2010 and are still there, despite the Paulson
Advantage fund being down over 46% for the year to
September.

Asset gathering to earn a steady stream of management fees
is now endemic in the hedge fund world, according to the latest
Greenwich Roundtable white paper, while for investors
– guided by the easy picks of their advisors
– it is simply the case that no-one has ever been
fired for hiring a brand-name hedge fund. Few have found the
courage to ask simple questions suggested by Greenwich
Roundtable participants: "Do we have access to first-class deal
flow? Can we realistically gain access to top-tier managers,
many of whom are closed or consider new investors by invitation
only?"

Next year’s investment decisions will need to
be based on realising investment goals rather than paralysis
and passivity that in turn can trap investors into faulty,
short-sighted decision making.

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